Arizona pension payouts bolstered by Phoenix

Bonuses, allowances are used to inflate benefits

by Craig Harris - Nov. 17, 2010 12:00 AMThe Arizona Republic

Phoenix officials repeatedly said former City Manager Frank Fairbanks turned down raises because of tough times during the last few years of his tenure even though he was underpaid compared with counterparts across the country.

But records obtained by The Arizona Republic while researching public-pension practices show Fairbanks actually accepted raises and bonuses, and received pay for unused vacation and sick leave, to earn $1.3 million during his final three years before retiring Nov. 5, 2009. His reported annual salary was $236,998, but that was only his base pay.

By significantly boosting his pay toward the end of his career, Fairbanks spiked his annual pension from the City of Phoenix Employees' Retirement Plan to $246,813 a year - the largest pension among all six public-pension systems in Arizona. That pension amount is roughly $47,000 more than the pension provided to every living former U.S. president.

Fairbanks' pension is one high-profile example of the rising costs to taxpayers of Arizona's six public-pension systems. An Arizona Republic investigation has found that increased benefits combined with declining pension-system investments over the past decade has led to soaring costs for taxpayers to keep the public-pension systems afloat.Last year's tab: $1.39 billion.

In Phoenix, the municipal pension program allows employees to add deferred compensation, fringe and travel allowances, and sick leave into their benefit calculations to boost their pensions.

This practice helps explain why Phoenix retirees receive on average about $10,000 more a year than retirees in the Arizona State Retirement System, the state's largest, covering state workers, public-school teachers and employees in most other Arizona cities.

Fairbanks insisted he never took a raise, that the increased money was "retention pay." City records call the pay hikes "performance enhancement."

"I made a fair amount of money, but the last time I checked there were 40 or 50 at the state who made more than me. I don't know if I made 10 percent of what the football coaches at ASU and UofA made. What I did impacted the community a little more than what the football coaches did," Fairbanks said. "Any evaluation done by the city, we came out the best in the country or the best in the world. The point is things weren't all that bad. The city was doing good work."

Taxpayers pay more

The city's pension trust is underfunded and has been battered by lower-than-projected investments, causing city taxpayers to pay more into the system.

In the past 10 years, the city's (taxpayers') cost to fund pensions for Phoenix employees increased 277 percent to $88.1 million a year. This fiscal year, which ends June 30, 2011, the cost is projected to hit $93.7 million or close to what the city spends to fund all of its parks programs.

While pension costs keep rising, the city this year increased rates and fees, imposed a 2 percent tax on food in April, and reduced library hours and parks and transit services to balance its budget. City employees, who have seen no reductions in their pension benefits, took compensation reductions of about 3 percent.

Councilman Sal DiCiccio, a critic of the city's spending practices, said the public should be outraged.

"They will demand change when they see retirees are making $100,000 in pension benefits," DiCiccio said. "The city is out of touch with the pain the public is going through."

In response to The Republic's examination of the city's pension system, Mayor Phil Gordon said he would form a blue-ribbon pension task force to examine the rising costs for Phoenix.

"It's something we have to address," Gordon said. "You brought it to light."

City Manager David Cavazos said he received approval from council members Sept. 22 to hire a consultant to review pay and benefits, including pension payouts, for Phoenix employees and to compare compensation costs with national standards. That approval came more than a month after The Republic filed a public-records request seeking information on pension benefits paid to Phoenix retirees.

Add-ons raise pay

While Fairbanks was in office, only his base salary was publicly disclosed.

Through public-records requests, The Republic discovered recently that Fairbanks' average annual total compensation during his final three years as a city employee was $434,828, well beyond his reported base pay. The final three-year average is a key factor, because it is that number that is plugged into a formula to determine a retiree's annual pension.

The amount of Fairbanks' final paycheck: $351,345, which included a payment of $237,654 for sick leave he never used.

During those last three years, he accepted four raises totaling $17,321 and two bonuses worth $40,000 each, records show.

The sick-leave payout, cashing in of unused vacation time, his car and phone allowances, and his raises and bonuses all were added to his base salary to calculate Fairbanks' final three-year average pay on which his pension benefit is based.

During his final year, meanwhile, Fairbanks froze all pay raises for those in city management, citing severe budget problems.

The city for more than a month refused to release Fairbanks' compensation records, despite two public-records requests. After the newspaper threatened the city with legal action for not complying with the Arizona Public Records Law, Mayor Gordon ordered release of the records.

The mayor said he was unaware Fairbanks had received such a large final check, though he was aware that the final payment included a $40,000 bonus the City Council had approved. All other additional pay beyond his base pay was based on Fairbanks' employment contract with the city, records show.

The mayor said the practice of cashing out unused sick leave and vacation should end because the city cannot afford it. He also said changes should occur to the pension system, because "it can't sustain itself."

Toni Maccarone, a city spokeswoman, defended Fairbanks' compensation, saying he was city manager for 19 of his nearly 38 years with the city, managing a $3 billion budget and more than 14,000 employees.

"His compensation was a fraction of the amount paid to CEOs with similar levels of responsibility, and his pension was part of that compensation," Maccarone said.

Fairbanks, 64, said his pension was large, but not out of the ordinary for someone with his length of service.

"I had been discussing retirement for at least five years before I left, and the City Council asked me to stay on. I passed up job offers to go elsewhere," said Fairbanks. "I was paid less than city managers in similar sized cities."

Fairbanks, however, was referring to his annual base pay.

Bob Murray, a consultant who recruits city managers and helped negotiate the contract for Cavazos, the current Phoenix city manager, said most city managers earn about $220,000 a year. He said those at the top of the scale earn about $350,000, and in a few rare cases total compensation exceeds $400,000 a year.

Murray said it is common in California for city managers to cash in sick leave and vacation to spike pensions, but that it is rare in other parts of the country.

Rising pension cost

Phoenix's pension program was created in 1953 by a vote of city residents. It is a defined-benefit plan similar to Arizona's five other public-retirement systems. It pays retirees lifetime annuities based on a formula that includes each retiree's final average compensation, years of service and a multiplier.

There are 4,931 retirees now drawing pensions, and the system is funded at 69.3 percent. That means if everyone in the Phoenix system cashed in their pension, the plan has enough money to pay just more than 69 cents on the dollar.

A fully funded system is at 100 percent. When that ratio falls, then contributions must increase either from employees or their employer. Retirement experts say a system is considered healthy if funded at 80 percent or better.

In the past 10 years, the cost for Phoenix residents to fund the city's pension system has increased because the amount the city contributes to the pension fund for each employee has more than doubled, primarily because of investment loses during the market downturn. The contribution now stands at an amount equal to 16 percent of each eligible employee's wages. That will increase to 18 percent next fiscal year.

The amount each employee contributes to that fund, meanwhile, remains at 5 percent of his or her wages. That rate is among the lowest in the state.

In addition to funding its own municipal pension fund, the city has been hit with rapidly rising costs in other Arizona pension systems to which it contributes on behalf of its police, firefighters and elected officials.

During the past decade, a period marked by rapid growth in the city, Phoenix's contributions to the public-safety pension system increased nearly 13 fold to $93.2 million, while contributions to the state pension system for elected officials nearly quadrupled to $136,142.

DiCiccio said he is fed up with what he called a greedy pension system taking advantage of taxpayers.

Gordon disagrees.

"We have 14,000 employees, and we have a pension system and salary system where many employees are underpaid, both in comparison to the public sector and private sector," Gordon said. "We have employees who work much harder than any other organization."

Yet records obtained by The Republic tell a different story.

They show the average salary in 2009 for a Phoenix worker, not including police and fire, was $53,906. The average pension was $29,880 a year. The average retirement age: 58.9.

The average salary in 2009 for a state employee was $46,841. The average pension in the Arizona State Retirement System, which covers state employees, was $19,788. The average retirement age: 60.4.

In private industry, the average salary in Arizona was $42,090, and only one in five employees has a pension similar to the city's. The U.S. Bureau of Labor Statistics and the U.S. Social Security Administration do not keep records on the average age of retirees in the private sector. Many financial planners say it is around 65.

2nd retirement plan

Along with its pension plan, the city offers an additional plan to enhance employee retirements. There are 10,706 workers enrolled in the plan, which will cost the city up to $38.4 million this fiscal year. That equals three-fourths of the $50 million generated from the new Phoenix food tax.

The average salary of those employees is $64,137, according to records obtained by The Republic.

For each participating employee, the city contributes to a 401(a) deferred-compensation plan that is similar to a 401(k) plan in the private sector.

The percentage contributed on behalf of each employee is determined by negotiations between employee groups and city management. Generally, the higher the salary, the higher the percentage, which peaks at 9.6 percent for police, fire and general city executives. For employees at the higher end of the pay scale, that means the city puts $96 into their 401(a) for every $1,000 of pay.

The city does not, however, require a matching amount to be contributed by the employee. Instead, it is a straight payment on behalf of each employee, with managers and executives receiving the largest.

Cavazos, the city's highest-paid employee with a $236,998 base salary, has a contract calling for the city to contribute an additional amount equal to 11 percent of his annual pay, or $26,070, into a deferred-compensation account. He is the only employee at that contribution level. Cavazos also is reimbursed 3 percent, or $7,110, of his required 5 percent annual contribution to the city's main pension system, meaning he only pays in 2 percent.

Cavazos said it is normal and customary for a city manager to receive a higher compensation package, and he has taken required furlough days like all other executives and managers. He also said he would neither seek nor accept any bonus or salary increase this year.

Changing the system

DiCiccio said Phoenix's pension system needs to be fixed. But he said City Council action is unlikely. Instead, he believes it will take a citizens' initiative.

While DiCiccio is an outspoken critic, he receives a $7,477 annual state pension for elected officials from his previous tenure on the council. And since being appointed in February 2009, he has received a $61,600 council salary, making him what is commonly referred to as a double dipper.

DiCiccio provided The Republic with records showing he unsuccessfully tried to stop his state pension after he returned to office, and he has donated $3,000 of his pension to the city's general fund since taking office again.

Just as DiCiccio by law cannot stop his pension, Cathleen Gleason, Phoenix's budget and research director, said the city's charter prohibits Phoenix from raising contribution rates on employees currently in the pension system. However, the city could make new hires put a larger share of their pay into the system, and Gordon said he could support a two-tiered system in which longer-tenured employees paid one rate and newer employees another.

Tucson, the only other Arizona city with its own pension system, implemented changes for anyone hired after June 30, 2006, after watching its pension costs steadily increase.

Tucson's new employees pay a variable contribution rate that is nearly twice as high as the 5 percent rate for employees hired before the cutoff.

Michael Hermanson, administrator for the Tucson Supplemental Retirement System, said his city wanted to have all employees pay a higher rate, but that it likely would have faced a court challenge.

Still, by making the change it did, that helped Tucson's contributions decline from a high of $24.3 million in 2006 to $21.3 million in 2009.

Costs rise Valley-wide

Most Valley municipal employees are part of the Arizona State Retirement System, which has raised contribution rates on cities with budget shortfalls. Cities also contribute to state systems for public-safety officers, elected officials and corrections officers.

Mesa's total contributions for public employees' pensions have risen more than 400 percent in the past decade, and this year's contribution is estimated at $30.8 million. Meanwhile, Mesa has reduced its general-fund spending by $84 million since January 2009.

Chandler taxpayers paid $12.9 million this year into city pensions, up from $3.1 million 10 years ago. Meanwhile, the city this year reduced staff by more than 100, has not given cost-of-living raises for more than two years, and is gradually increasing employee contributions for health benefits, said Management Services Director Dennis Strachota.

In Peoria, pension contributions for public employees and elected officials jumped from $1.8 million in fiscal 2001 to $8.4 million in fiscal 2010. Peoria Budget Director Jeff Tyne said the contribution rates over the past several years are "taking a larger portion of the budget . . . It's a cost driver we have to work through, but we just try to manage within our means."